Local Funding Sources

While federal and state support of early childhood is essential, local revenue has also plays an important part in expanding access to high-quality early learning in some communities. Local Smart Beginnings efforts have designed local systems incorporating funds from multiple sources.¹

As an important contextual note, in Virginia localities are split into counties, towns, and independent cities. Generally speaking, following the Uniform Charter Powers Act, independent cities have much more autonomous taxing authority than other localities. This means that in areas where the General Assembly (GA) has granted taxing authority to localities, cities may impose or lower taxes without limit or prior approval. Counties, on the other hand, must get GA approval for most taxation changes. Towns are sub-units of counties and have the ability to levy a limited number of supplemental taxes on top of county taxes, similarly subject to GA approval. Virginia remains a “Dillon Rule” state, meaning that localities only have legislative powers, such as taxation, that are explicitly given to them by the GA.

This section describes some of the local sources of revenue that communities can explore to fund necessary services for young children.

All figures cited below refer to FY2016 and come from the state.

Source

What is it?

How does it work?

How is it used now?

Property Taxes

Counties, cities and towns may lower or raise property taxes in Virginia. Property taxes represent by far the largest source of local revenue, accounting for more than two-thirds of local budgets. Property tax revenue goes into a locality’s General Fund, where they are used for a variety of municipal functions, including education. Virginia is considered to have below-average property tax rates compared to national averages, with wide variation among localities.

Property taxes can be levied on real property (property that stays in one place, like a house) and personal property (property that moves, like a car). There is no limit on the tax rate. The tax is based of assessments of the property’s value, presented as a percent per every $100 of valuation. For instance, in Albemarle County, the average effective tax rate is $0.72 per $100 of valuation. By state law, cities are required to reassess at least every two years and counties every four years. Smaller cities and counties (less than 30,000 and 50,000 people respectively) can vote by referendum to instead reassess every four, five or six years. Some localities require annual reassessments. The reassessment timeframe is important because if home values have gone up or down significantly over the course of the intervening years, that can considerably change the locality’s revenue base for better or worse.

Combined, real and property taxes account for about 78% of county tax revenue and 66% of city tax revenue, collected in order to support local services. These services include public education and can include early childhood education services.

Sales Taxes

Localities may impose a 1% local sales & use tax, but are legally restricted from raising it past that rate. All localities in Virginia currently impose this 1% tax.

Most goods and services purchased within the locality’s boundaries are subject to the sales tax.

Sales taxes account for an average of 8.5% of city tax revenue and 6.7% of county tax revenue, and go into the General Fund.

Local Business Tax

Cities and counties in Virginia can levy a few different local business taxes. Specifically, in descending order of revenue, they can levy business license taxes, machinery & tool taxes, and merchant’s capital taxes (a tax on a businesses’ available physical stock). Business license tax rates have statewide statutory maximums that vary by business type.

Business license taxes apply to businesses that are physically located within a locality, machinery & tool taxes are for significant pieces of heavy equipment (such as manufacturing, broadcasting, or dry cleaning equipment), and merchant’s capital taxes is applied to available stock (such as unused rental car fleets).

Nearly all cities and about half of counties are at their maximum business license tax levels, making up approximately 6% of city revenue and 3.6% of county revenue. Machinery & tool taxes and merchant’s capital taxes tend to be negligible in their revenue generation (combined about 1%), although can be more significant in more manufacturing-heavy localities.

Meals Taxes

The authority to levy meals taxes varies significantly between cities and counties. Cities may levy a tax with no restriction on the rate and no voter approval required; counties may not levy a tax higher than 4% and require voter referendum approval (there are statutory exceptions for Roanoke, Rockbridge, Frederick, Arlington, and Montgomery Counties, which can bypass the referendum process with a unanimous vote of their Board of Supervisors). Roughly half of Virginia counties have voted to adopt a meals tax, however in the past decade, only one-quarter of referenda have passed.

Meals taxes apply to food or drink purchased at a food establishment. Caterers must also collect meals taxes. The taxes are collected by the establishment and then remitted to the locality. Meals taxes do not apply to factory-sealed items and do not apply to grocery or convenience stores; there are also certain categorical exemptions built into each locality’s ordinance.

Meals tax revenue accounts for 7.3% of city revenue and only 1.3% of county revenue. They go into the General Fund and can be set aside for specific purposes. For instance, in early 2018, Richmond City raised their meals tax in order to help fund school facility repair and construction.

Cigarette/ Tobacco Taxes

Similar to meals taxes, cities have unlimited cigarette taxing authority. Counties may only levy cigarette taxes with specific GA approval, and then only up to the state tax level of $0.30 per pack. Currently only Fairfax and Arlington Counties have this authority.

Cigarette and tobacco taxes apply on a per-pack basis.

Cigarette and tobacco tax revenue accounts for 1.2% of city tax revenue and essentially zero percent of county tax revenue outside of Fairfax and Arlington Counties.

Other Licenses and Fee Taxes

Cities and counties can put into place a variety of smaller licenses and fee taxes. The most notable of these are the lodging/occupancy tax and the motor vehicle license tax. There are also available taxes in the form of legal documents recordation taxes; bank franchise taxes (tax on the net capital of banks); admission taxes (for entertainment venues); utility taxes (electricity & gas use); rental taxes; specifically for the Southwestern part of the state, severance taxes on minerals and energy sources like coal (these go into a separate, purpose-limited fund for roadways and economic development); and, specifically for parts of Northern Virginia, personal income tax (capped at 1% and going into a purpose- and time-limited fund for transportation)

Each of these smaller taxes has their own mechanism, but work similarly to the other taxes listed above; of the ones listed here, only the lodging tax is differentiated by cities (unlimited authority) and counties (2% maximum rate unless authorized by GA).

These smaller taxes each make up between 0% and 2% of localities’ revenues streams.

Bonds

In Virginia, localities may issue general obligation bonds, subject to certain restrictions. Bonds are debt obligations that investors buy, providing immediate cash to the locality, and then the bonds ‘mature’ (are paid back with interest) on a given date. Cities can issue bonds without a referendum, but may not take on a debt load exceeding 10% of their total real property value. Counties can issue bonds with no limit, but must get voter approval, unless they are issuing bonds for the Virginia Public School Authority (a state financing institution that provides financial support to public school divisions). Either way, many localities still choose to put bond questions before voters. Unlike some states, School Boards in Virginia have no authority to issue bonds, so must rely on their corresponding city/county government to do so.

Each locality follows a bond issuance process that goes through local legal departments and a bond rating agency.

Bonds are most often used to finance school construction, arenas, or other major capital projects that a locality cannot absorb into its annual budget. For instance, in 2017, voters in Fairfax County, Loudon County, and the city of Falls Church approved a total of over $515 million in bonds to be used for school facilities.